The Popular Definition of Income and Its Implications for Tax Policy

Executive SummaryThe debate about overhauling the federal tax system is, at the most fundamental level, a debate about the proper tax base — in effect, the proper economic definition of income. The statutory history of the income tax has generally relied on a definition of income imputed to the “common man,” a definition which the Supreme Court effectively ratified in the 1921 Eisner v. Macomber case.

However, as the survey results reported in indicate, the popular definition of income —when compared with scientifically consistent definitions of income — is replete with internal inconsistencies. Indeed, for purposes of taxation, only one scientifically consistent definition of income exists — that definition which underpins current federal pension laws, also known as “yield income.”

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